Fresh challenges after IMF PSI plan

Tanzania’s three-year program with the IMF under the Policy Support Instrument was completed on June 3. The program, originally approved in 2010, aimed at fostering economic growth, creating additional fiscal space to scale up investment, and containing economic vulnerabilities, writes Thomas Baunsgaard (pictured).

Three years later, it is time to reflect on the achievements. How did the PSI program do in meeting these objectives? I would say that significant progress has been made, but some challenges remain.

High economic growth

Economic growth has been very strong during the last three years. The top drivers of growth have been construction, trade, and telecommunications, with agriculture lagging behind. The limited progress in reducing poverty has been more disappointing.

Looking ahead, it will be crucial to sustain the high growth performance, to achieve the government’s target of reaching middle income status by 2025. Broad based growth in agriculture, manufacturing and services is necessary to create more jobs and help people escape poverty.

Creating fiscal space

The PSI program aimed at gradually reducing the budget deficit while creating space for new investment and social spending. The actual fiscal performance during the last three years was a bit looser than initially intended.

Nonetheless, while still high, the budget deficit has come down and priority spending has been bolstered. The recently approved budget for 2013/14 seeks to maintain this focus.

Steady improvement in revenue collection has helped, resulting from both tax administration efforts and new tax policy measures. Moreover, there is scope for further revenue mobilization by reducing tax exemptions.

The PSI program highlighted the government’s plans to contract loans, including on commercial terms, to finance part of the planned investment program. The subsequent increase in government debt has attracted much attention in the public debate in Tanzania.

The key question is whether the debt can be serviced and eventually repaid without crowding out other spending priorities.

The debt outlook remains sound. Still, with less room today for future borrowing, it is important to borrow only for projects with high economic return that sustain the growth potential of the economy. There are also benefits from fostering an environment where the private sector has incentives to invest in infrastructure.Economic shocks and vulnerabilities

Handling the inflation shock that hit the East African region when food and fuel prices surged in 2011 became a key monetary policy challenge during the PSI program.

In Tanzania, inflation peaked at 20 percent in December 2011, but has since gradually fallen back to single digits. Given the burden of inflation, especially on the poor, the reduction in inflation is good news. It is appropriate for monetary policy to continue to aim at low inflation.

The external current account deficit has been larger than foreseen at the outset of the program. This partly reflects foreign direct investment and imports of capital equipment. Comfortingly, the Bank of Tanzania has over $4.2 billion in international reserves.

Nonetheless, enhancing the flexibility of the exchange rate will help the economy adjust to external imbalances and reduce the chances that the competitiveness of Tanzanian exports would worsen.

It has been a challenge to ensure reliable and affordable electricity to support the growing economy. Following power disruptions in 2011, Tanesco relied more on liquid fuel as a source of power generation.

Electricity tariff increases in January 2012 only partially covered the higher cost, and a more automatic system for adjusting tariffs has not yet been adopted.

The government has now prepared a medium term plan to move the energy sector to a more sound financial footing.

This envisages making fuller use of existing gas fields to generate electricity at lower cost by building more gas-fuelled power plants and a new pipeline. The challenge is to get through the transitional period until the new investments bear fruit.

Gas on the horizon

The natural gas discoveries in the deep offshore waters are an exciting development. However, there is still much work ahead. None of the companies exploring for offshore gas has yet reached a final investment decision.

There is also a demanding agenda to prepare the policy and regulatory environment for natural gas. Moreover, any significant revenue will not start for perhaps another decade. In this regard, it will be critical to manage expectations.Importantly, Tanzania has a latecomer’s advantage to learn from the experience of other countries to ensure that the benefits from natural gas are harnessed to the advantage of all Tanzanians.

Looking ahead

What’s next for relations with the IMF? Our staff has worked closely with the government by providing advice and technical assistance. Through the staff reports—all publicly available—the government has signaled its macroeconomic policy stance.

During the next six months Tanzania will continue to have a program with the IMF (through the 18-month Standby Credit Facility that was approved in July 2012). Beyond that, the government has indicated that it is considering options for future relations with the IMF.

Source: The Citizen, written by Thomas Baunsgaard, the International Monetary Fund Resident Representative in Tanzania